Stock Overhang Levels Spike after 5-Year Fall

January 4, 2002 (PLANSPONSOR.com) - Average stock
option overhang levels increased to 14.6% in 2000, from 13%
the previous year, reversing a five-year trend during which
overhang growth slowed, according to a new study by Watson
Wyatt Worldwide.

The increase can be partly attributed to 2000’s weak
stock market – which led to fewer options being exercised,
despite employers granting them at a constant rate.

Despite the rising average overhang, more than half the
companies studied reduced their overhang during 2000, but
did not do so by enough to offset the amount by which other
employers increased overhang levels.

Defined

Stock option overhang refers to the number of stock
options granted added to those still to be granted as a
percentage of a company’s total shares outstanding.

Employees are granted stock options as an incentive or
as part of overall compensation, however, shareholders
harbor concerns that the number of options granted will
dilute the value of the shares that they hold.

According to research by Watson Wyatt, there is an
optimal level – which varies by industry – where the
incentive and dilution effects are balanced for maximum
benefits to both employees and shareholders.

The research shows that achieving optimal overhang is
important during both bull and bear markets. In 2000

technology firms with near optimal overhang levels
of 26% in 2000 returned a negative 1.7% to
shareholders,

while firms with high overhang levels of over 29%
lost nearly 40% of their value in 2000, and